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External Audit Reports Standards Coursework

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Updated: May 7th, 2022

Introduction

Auditors perform examinations of financials within a particular establishment to determine whether the company complies with the existing regulations or to detect fraudulent activity. International Standard on Auditing (ISA) provides an explanation of specific criteria that auditors have to adhere to when performing their work. This is reflected in the report – a finalised version of an auditor’s work which provides information regarding the examination that was conducted. This paper aims to review particular standards, which apply to external audit reports and identify criteria for standards number 220 and 320.

Standards of Reporting

An excellent external report should provide extensive information regarding the actual state of financials of an establishment. According to BPP Learning Media (2017), an external audit report presents an independent opinion concerning the financial statements of an organisation. In general, it gives an understanding of whether these financial statements are recorded in accordance with the existing regulations. BPP Learning Media (2017) emphasises that while the auditor may provide recommendations to the board of directors of a particular company, the purpose of the report is to only display factual information.

Criteria to be provided in the External Auditor’s Report

BPP Learning Media (2017) state that the specific rules for an auditor’s report are regulated by the ISA 700, ISA 7001, ISA 705, ISA 706 statutes. These standards provide advice on the formatting of the document and specific information that should be included by the auditor. For instance, ISA 700 is a guidance about the formation of judgement connected to the financial statement that an auditor reviewed (International standard on auditing 700 2009).

In addition, it contains regulations concerning the content and format of the report itself for the general financial statements. For example, the standards emphasise the importance of consistency in the text, which enables a clear understanding of the findings (International standard on auditing 700 2009). This is facilitated through the preparation process in which the auditor determines whether the financial statement can be reviewed or if it contains significant errors. Moreover, it is crucial to identify if any bias is present within the management of a company that could have an impact on the financial outcomes (International standard on auditing 700 2009). This element is included in the conclusion of the report.

Next, the auditor should include a Key audit matters (KAM) statement in the report, which is the most important standard. According to Kesimli (2019), KAM is the primary issues that an auditor decides to discuss as part of the report. This ISA standard applies in case an auditor wants to communicate a particular matter or if he or she are required to do so by the law. This aspect of an auditing report should reference specific disclosures in the actual text (Arnold 2017).

This component aims to provide additional insight into the scope of work that was performed and ensure transparency (Arnold 2017). When determining which parts should be included in KAM one must evaluate the elements that imply high assessment risk, in accordance with ISA 315. An auditor should state his or her judgment regarding particular accounting issues that lead to uncertainties or those that have significant issues affecting the financial statement as a whole. The final component is the impact that the process of auditing had on particular operations.

Formal Quality Report Standards

Audit quality can be defined through the adherence to the existing standards, coherent and understandable statements made by an auditor. These standards are reviewed by multiple organisations consisting of boards that ensure the transparency of the process (International Federation of Accountants n.d.). The aim is to create criteria that would be applicable in real life audits, and that would ensure the efficient work of the auditors.

An auditor must ensure that his or her work is compliant with the current standards of performing audits and preparing a report, as those are updated regularly. According to the International Federation of Accountants (n.d.), it is crucial to ensure that an auditor adheres to the current standard developed by international organisations because those determine the quality of the performed work. It is essential for the report to reflect the factual statements, while an auditor may indicate his or her opinion regarding specific components that affect the financial statements of a company in particular parts of the text that were discussed above.

Standard No. 220

While it is evident that quality is a crucial determinant of the report outcomes, auditing companies have to ensure that their internal processes are developed in accordance with the current standards. According to the International Federation of Accountants, the 220 standard regulates quality control within the audition process (Exposure draft, the international standard on auditing 220 (revised) 2019).

Together with the ethical requirements for auditing, this standard presents an understanding of how companies that provide audit services should control their internal processes. Firstly, these firms have to ensure that their personnel and procedures comply with the ethical and legal standards (International standard on auditing 220 2009). Additionally, this International Federation of Accountants regulation implies that such firms have to have quality control systems in place.

Standard No. 320

The notion of materiality refers to the importance of particular standards and ability to ignore them if necessary when the impact of those is relative to the result. According to the Financial Reporting Council (2016, p. 2), the standard in question is responsible ensuring that auditors utilise “the concept of materiality in planning and performing an audit of financial statements”. Therefore, this statement aims to identify in which cases an auditor can apply this strategy in his or her work when preparing or carrying out an audit.

This standard takes into account the notion of misstatements, which should be defined in the report. In general, an auditor should ensure that a financial statement that he or she reviews is free of errors (International standard on auditing 300 2009). This concept is essential because an auditor has to make a judgment regarding a particular misstatement, its nature and relative importance to the result. It is necessary to choose a specific benchmark that would serve as an indicator for the auditor when evaluating misstatements (Materiality in the audit of financial statements n.d.). Using this information an auditor can identify which components if a financial statement contains crucial mistakes.

Conclusion

Overall, it is crucial for auditors to comply with the standards identified by the International Federation of Accountants and ISA. Primary standards number 220 and 320 provide an understanding of the essential components that an auditor’s report consists of, quality standards and materiality elements. However, other regulations, such as ISA 700, ISA 7001, ISA 705, ISA 706 are applicable as well. In addition, currently, auditors are required to include a KAM statement in their report, highlighting the key components and impact that the auditing process had on an establishment in question.

Reference List

Arnold, C 2017, . Web.

BPP Learning Media 2017, ACCA F8 audit and assurance, BPP Learning Media, London.

2019. Web.

Financial Reporting Council 2016, International standard on auditing (UK) 320 (2016), The Financial Reporting Council limited, London.

International Federation of Accountants n.d., . Web.

2009. Web.

. Web.

. 2009. Web.

Kesimli, I 2019, External auditing and quality, Singapore, Springer.

. n.d. Web.

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